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REAL ESTATE: Lack of Stock Keeps Tianjin from Ranking as a Tier 1 Real Estate Market
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altBased on how Jones Lang LaSalle (JLL) categorises cities and their property markets, Tianjin is on the cusp of being China’s fifth Tier 1 city. At present, the four Tier 1 cities are Shanghai, Beijing, Guangzhou and Shenzhen. As explained in JLL’s report, China50: Fifty Real Estate Markets that Matter, these Tier 1 cities have the highest levels of economic activity, strongest connections to international markets, significant numbers of international office and retail tenants, the most well-developed international grade stocks; as well as the most transparent and liquid markets. In terms of economics and markets, Tianjin is as good as its peers and is on the verge of surpassing a few cities, but from a real estate stock point of view, the city is still playing catch up.

The economy of Tianjin is already on par with some of the Tier 1 cities. At the end of 2012, the gap between Tianjin’s and Shenzhen’s economies was approximately CNY 7 billion, but by the end of 2013, Tianjin will be poised to eclipse Shenzhen as the city with the fourth largest GDP in China. Moreover, by the end of 2014, that gap will widen, not only putting Tianjin ahead of Shenzhen, but Guangzhou as well. Foreign direct investment (FDI) in Tianjin has also been robust; in 2011, Tianjin bested all Tier 1 cities and over the past few years has only lagged behind Shanghai, indicating that this city is a top destination for global investors. FDI in the city has grown at the same time that the government has been working to be more transparent and efficient. Recently, the China Institute of City Competitiveness ranked Tianjin first in government efficiency.


As is highlighted in our forthcoming white paper China’s City Winners: Tianjin City Profile, driving Tianjin’s expansive growth and high levels of FDI have been the city’s active international trade port and its move up the value chain, with its burgeoning aerospace and new energy sectors- as well as maturing service sector. The tertiary industries now account for nearly half of the city’s economic output, whereas five years ago, it represented less than 40%. Helping to advance the rise of the city’s economy has been international companies that have come to leverage the cities proximity to Beijing, its highly educated workforce and rapidly improving infrastructure. By the end of 2012, approximately 150 fortune Global 500 companies had set up subsidiaries or manufacturing bases in Tianjin. These economic structural changes and strengthened ties to the international business community, in addition to Tianjin’s minimal reliance on the export market (Tianjin is a net importer), have allowed the city to experience GDP growth rates that on average far exceeds its peers. 


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But, even as the city grows and becomes more international, its real estate stock has yet to reach the levels of the Tier 1 cities. The Grade A office market is where the difference between Tianjin’s real estate market and Tier 1 cities’ is the clearest. Despite having approximately the same number of tertiary industry workers as Shenzhen and Guangzhou – tertiary employment is a key barometer of office demand, Tianjin has only about a tenth of those cities’ total Grade A office stock. The dearth of quality Grade A space in Tianjin becomes more perplexing in the face of Grade A office demand. Tianjin’s best Grade A office buildings hold occupancy rates above 95% and many tenants, particularly multinational corporations, in these buildings have had to delay expansions due to a lack of quality Grade A space in the market. Anecdotally, the Jones Lang LaSalle Tianjin office has been wanting to expand for several months (we really need more space, I do not think I am able to get out of my desk without ramming the back of my chair into my colleague’s behind me); however, until recently there has been no space in our building to allow for further expansion. Thus, with supply limited and demand strong, you would think developers would be clamouring to build more Grade A buildings in Tianjin, helping to push the city into the Tier 1 bracket.


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So why are developers and investors so reluctant to build more Grade A buildings in this city? A significant reason for this is the perception that Tianjin’s office market is oversupplied and there is not enough demand to support new projects. These perceptions are a little overblown, as even the Grade B market in Tianjin has been experiencing strong demand; nearly all the Grade B projects in the city have occupancy rates of 90% or better. The main force behind the misconception of the Grade A office oversupply story is the iconic Tianjin World Financial Centre (TWFC).


The TWFC was completed in 2011 and immediately tripled the size of Tianjin’s Grade A office stock. Initially the developer of the project planned to retain ownership over the whole building, but over time, the company changed its plans and began selling part of the building strata-title. Once the developer started to sell the project strata-title, demand for the project eroded, as most Grade A office tenants prefer to be in buildings that have a single ownership structure. With less of the TWFC’s target tenants interested in the building, occupancy has been slow to increase, and because the office tower accounts for two thirds of the total Grade A stock, the Grade A overall vacancy rate has become “overly inflated.” Overly inflated because the building no longer attracts the same tenants as the rest of the Grade A office towers, which all have single ownership structures.


Looking at the chart above, you can see that TWFC is solely responsible for the high Grade A office vacancy rate. Hence, developers need not fear constructing new high quality Grade A buildings in the city, as long as they develop office towers that fit the demands of the Grade A office tenants. As soon as developers squelch their fears of oversupply and return to the market, Tianjin will be alleviated to Tier 1 status.
 
 

By Durrell Mack, Head of Tianjin Research, Jones Lang Lasalle
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